Assen Yagodin, Chairman of Bulgarian Development Bank: The banking system has buffers for covering future problem loans

- Mr. Yagodin, one more difficult year for businesses, households and the economy as a whole passed. What lessons did banks learn after four years of crisis and what are your expectations for Bulgaria’s development in 2012?
- We have arrived at several main conclusions from the past few years. The first one is that people should better live in accordance with their actual incomes and must ‘cut their coats according to the cloth’, as the saying goes. The second conclusion is that bankers should be very careful in their operation during a credit boom in order to avoid overheating of their activities. At a time of an economic downturn, problems such as the present ones occur, i.e. provisioning of bad loans and problems with the repayment of credits. The third conclusion is rather for State leaders who must know that even if there is easy access to external financing, they should not be tempted to have unreasonably large debt exposures, which would allow them an artificially high standard not corresponding to the economic reality. In general, the debt to GDP ratio is good in Bulgaria, as well as the level of the redistributive function of the budget and of the budgetary discipline. Our country can serve as an example according to many indicators. At the same time, we must be working actively so that the actual incomes of households start to approximate more intensely the average level in the European Union.

- What measures should be undertaken to this end?
- The main prerequisites for doing business in Bulgaria are in place. I do not mean only the low tax burden, the relatively low labour costs and the stable banking system, but also other factors such as the country’s geographic position and the current development of infrastructure. All these prerequisites for doing business are here, but less stringent regulations for companies are perhaps needed. On the other hand, employees must take efforts to achieve greater efficiency. We know that the incomes of Bulgarian employees are not high, but at the same time, productivity is lagging far behind that developed economies.

- What are your expectations for the development of our country in 2012?
- In general, the expectations for Bulgaria should be more positive, compared to many EU member states, given that the country does not have the burden of an excessive debt. But there are still many challenges, which our country faces because our economy is an open one and some of our neighbours are experiencing a strong downturn or stagnation, which will probably last longer than a year. There are other risks related to the excessive dependence of our country on the EU economies as well. Bulgaria will need time in order to shift to Eastern markets. This will have a recovery impact on our country, but it will take time. Our prospects are better than those of other countries, but we cannot expect a significant change, compared to 2011. I am anticipating the same tough year, which would create a good basis for economic growth.

- The Bulgarian National Bank reported a new growth of non-performing and restructured loans. They have already exceeded a total of BGN 9 bn. According to a recent statement of Ivan Iskrov, the banking system has enough resources to absorb even more non-performing loans. But when do you think they will reach their peak?
- The banking system has two or three buffers that stand available in order to cover future problem loans. First, we have an extremely high capital adequacy. It has been repeatedly reiterated that European banks are seeking to reach a capital adequacy of 9%, given that our system has reported some 17% of this key figure. At the same time, the allowances, which have been allocated so far, have covered the problem exposures, which are following a continuing deteriorating trend or even incur losses. We also have a sustained profit within BGN 600-700 mln, which continues to be capitalized, and creates another buffer. The high liquidity is an expression of the high confidence in the banking system. After the onset of the crisis, there has not been a single case of a bank, which has referred the regulatory authority or to the Government with a request for support.

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